Ahmad Macky
18 December 2007
Port Louis — Most markets lie between the two extremes of monopoly and perfect competition in the realm of 'imperfect competition'.
The competition bill approved by Parliament invites some comments. Very few markets in practice can be classified as perfectly competitive or as a pure monopoly. The vast majority of firms do compete with other firms, often quite aggressively, and yet they are not price takers: they do have some degree of market power. Most markets, therefore, lie between the two extremes of monopoly and perfect competition, in the realm of 'imperfect competition'.
There are two types of imperfect competition: namely, monopolistic competition and oligopoly small firms, whereas under oligopoly there will normally only be a few - say , between two and twenty. Let us look at the monopolistic competition. This was a theory developed in the 1930' by the American economist Edward Chamberlin. Monopolistic competition is nearer to the competitive end of the spectrum. It can best be understood as a situation where there are a lot of firms competing but where each firm does nevertheless have some degree of market power ( hence the term 'monopolistic' competition): each firm has some discretion as to what price to charge for its products.
There is quite a large number of firms assuming monopolistic competition in this country. As a result each firm has an insignificantly small share of the market, and therefore its actions are unlikely to affect its rivals to any great extent. What this means is that each firm in making its decisions does not have to worry how its rivals will react. It assumes that what its rivals choose to do will not be influenced by what it does.
This is known as the assumption of independence. Moreover there is freedom of entry of new firms into the industry. If any firm wants to set up in business in this market, it is free to do so. In these respects, therefore, monopolistic competition is like perfect competition. Unlike perfect competition, however, each firm produces a product or provides a service in some way different from its rivals. As a result it can raise its price without losing all its customers. Petrol stations, chemist shops, hairdressers and builders are all examples of monopolistic competition.
A typical feature of monopolistic competition is that, although there are many firms in the industry, there is only one firm in a particular location. This applies particularly in retailing. There may be many greengrocers in a town, but only, one in a particular street. In a sense, therefore, it has a local monopoly. People may be prepared to pay higher prices there for their vegetables to avoid having to go elsewhere. It is similar with the general food store. Once a week people may go to the supermarket where prices are cheaper, but if they run out of one or two items during the week they will go to the shop on the corner, even though it is dearer.
Take the case of a petrol station near a new housing estate. If it is the only one in the neighbourhood, it will have considerable market power. It may face a relatively high and inelastic demand. Motorists may have to travel a long way to get to the next filling station. Some motorists might be prepared to do just that if the price of its petrol were high and if the next filling station were 'en route' for them. Others , however, may find it inconvenient to go to another station, or may have to use extra petrol to do so (thus cancelling out any cost advantage). In the short run, therefore, it may be able to charge a high price and make large supernormal profits.
If typical firms are earning supernormal profit, new firms will enter the industry in the long run. In the case of the petrol station we were looking at just now, new ones are likely to open in the neighbourhood: not necessarily in the same place, but may be at the other end of the estate..
As new firms enter, they will take some of the customers away from the existing firms. The demand for the existing firms will therefore fall. So competition bill can lead certain firms to make maximizing profit under an imperfect competition.
Be the first to Write a Comment!
Copyright © 2007 L'Express. All rights reserved. Distributed by AllAfrica Global Media (allAfrica.com). To contact the copyright holder directly for corrections — or for permission to republish or make other authorized use of this material, click here.
AllAfrica aggregates and indexes content from over 125 African news organizations, plus more than 200 other sources, who are responsible for their own reporting and views. Articles and commentaries that identify allAfrica.com as the publisher are produced or commissioned by AllAfrica.
